How to Get Entirely Tax-Free Retirement Income

Last Modified on February 15, 2022

Retirement planning in itself is a task that is dreaded by many. It is not just about making a decision; it is also about financially planning for it. The goal is to save as much as you can.  And while you are at it, getting tax-free retirement income tops the priority chart. 

There is an age-old saying, ‘It is important to work hard, but more important to work smart’. Getting tax-free retirement income is all about working and planning smartly. 

3 Tips to help you boost your Tax-free Income in Retirement

1. Health Saving Accounts

HSAs or Health Saving Accounts are one of the best ways to get tax-free retirement income. People usually use HSAs to only pay current medical bills and do not consider it as a retirement saving source. But interestingly, HSAs can give you more tax benefits than 401(k) or individual savings account, while paying for medical expenses now or after your retirement. Money in HSA accounts can be withdrawn and used as tax-free retirement income. This adds to major savings as medical expenses can constitute a huge chunk of your post-retirement budget.

To reap in more benefits out of this account, consider this as an investment source. Do not use the money here to pay for current medical bills, instead, let it stay till the time you near retirement. As quoted by an expert on the Wall Street Journal website, “Due to the HSA’s extra tax advantages, each dollar I put into my account will turn into $2.19 after 20 years, assuming a 4% annual inflation-adjusted return; according to Vanguard Group, by contrast, the same dollar will be worth just $1.64 after I take it out of a traditional 401(k) in two decades and pay income taxes on the withdrawal. (The example assumes a 25% federal income-tax rate and ignores state tax.)” 

While having an HSA account is a great way to get tax-free retirement income, there are chances that one may not be able to afford a Health Savings Account in the first place. HSAs require people to be insured under the HSA plan, a plan that is infamously costly. Typically, the HSA plan will require you to pay a monthly due of $1350 (as of 2018). While HSA is one of the best ways to get tax-free retirement income, it also comes with its own cost. But don’t worry! The American market is full of plans and providers who can offer competitive benefits at lower costs.

2. Roth IRA and 401(k)

Putting your savings in Roth IRA is another great way to enjoy tax-free retirement income. With Roth IRA, you are exempted from paying tax on the amount you put in now as well as on the amount you withdraw after retirement.

This is also a great way of saving on other general taxes. The amount of taxes you pay in a year is proportionate to how much you have earned in a year. The only drawback about this method is that you need to maintain a specific investment rate throughout the year. According to Forbes, “Only couples who earn up to a combined $189,000 each year and singles who make $135,000 or less can contribute to a Roth IRA.” 

When it comes to 401(k), the best tax-free retirement income tip is to invest in one common 401(k) account instead of investing and saving in multiple accounts. It saves you the mental stress and time of calculating and keeping track of your money in each account. At the same time, it adds to tax benefits. 

3. Other potential Tax-free Retirement Income ways

Investing in life insurances and municipal bonds are unconventional ways that very few people opt for. While the other options assure you tax-free retirement income, both these ways present the same potential.

1. Municipal Bonds are more of an investment to get one step closer to tax-free retirement income. You need to be careful before investing and must evaluate if the bond is aligning with your current financial standing and future goals. The money you put in here might be subject to state income tax but is free from federal income tax. Lower interest rates are another added perk in comparison to other taxable bonds.   
2. Similarly, Cash Value Life Insurance helps you in maintaining your financial independence after you are married and have kids. If handled smartly, insurance accounts can be an alternative to a Roth account, where money grows with time and you can withdraw it without any tax deductions. 

To sum it up

Tax systems and calculations keep changing. They form one of the most dynamic chunks of the financial world. But to enjoy tax-free retirement income, keep yourself updated on what the current taxation rules and regulations are and know the smarter ways of going around it. Try calculating how retirement will impact your living expenses so you can set the right goals for yourself.  With proper knowledge, you can reach your retirement goals with minimal or no tax deduction at all. 

Worried if you have the time to chalk out an extensive strategy to get tax free retirement income? Let financial advisors handle it for you. Not only will your retirement planning be in safe hands, but you can also be sure of maximum benefits.